HR 1207

I mentioned in my earlier article that Ron Paul wants to audit the Federal Reserve. I had a little trouble interpreting the proposed bill at first so I thought I’d lay it out so it is easier for the next sucker to follow. The proposed bill, HR 1207, amends section 714 of title 31, United States Code as follows:-

Blue is the unamended original text, strikeout is text to be removed, red text is new text.

(a) In this section, “agency” means the Financial Institutions Examination Council, the Federal Reserve Board, Federal reserve banks, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision.

(b) Under regulations of the Comptroller General, the Comptroller General shall audit an agency., but may carry out an onsite examination of an open insured bank or bank holding company only if the appropriate agency has consented in writing. Audits of the Federal Reserve Board and Federal reserve banks may not include—

(1) transactions for or with a foreign central bank, government of a foreign country, or nonprivate international financing organization;

(2) deliberations, decisions, or actions on monetary policy matters, including discount window operations, reserves of member banks, securities credit, interest on deposits, and open market operations;

(3) transactions made under the direction of the Federal Open Market Committee; or

(4) a part of a discussion or communication among or between members of the Board of Governors and officers and employees of the Federal Reserve System related to clauses (1)–(3) of this subsection.

(c)

(1) Except as provided in this subsection, an officer or employee of the Government Accountability Office may not disclose information identifying an open bank, an open bank holding company, or a customer of an open or closed bank or bank holding company. The Comptroller General may disclose information related to the affairs of a closed bank or closed bank holding company identifying a customer of the closed bank or closed bank holding company only if the Comptroller General believes the customer had a controlling influence in the management of the closed bank or closed bank holding company or was related to or affiliated with a person or group having a controlling influence.

(2) An officer or employee of the Office may discuss a customer, bank, or bank holding company with an official of an agency and may report an apparent criminal violation to an appropriate law enforcement authority of the United States Government or a State.

(3) This subsection does not authorize an officer or employee of an agency to withhold information from a committee of Congress authorized to have the information.

(d)

(1) To carry out this section, all records and property of or used by an agency, including samples of reports of examinations of a bank or bank holding company the Comptroller General considers statistically meaningful and workpapers and correspondence related to the reports shall be made available to the Comptroller General. The Comptroller General shall give an agency a current list of officers and employees to whom, with proper identification, records and property may be made available, and who may make notes or copies necessary to carry out an audit.

(2) The Comptroller General shall prevent unauthorized access to records or property of or used by an agency that the Comptroller General obtains during an audit.

(e) Audit and Report of the Federal Reserve System-

(1) IN GENERAL- The audit of the Board of Governors of the Federal Reserve System and the Federal reserve banks under subsection (b) shall be completed before the end of 2010.

(2) REPORT-

(A) REQUIRED- A report on the audit referred to in paragraph (1) shall be submitted by the Comptroller General to the Congress before the end of the 90-day period beginning on the date on which such audit is completed and made available to the Speaker of the House, the majority and minority leaders of the House of Representatives, the majority and minority leaders of the Senate, the Chairman and Ranking Member of the committee and each subcommittee of jurisdiction in the House of Representatives and the Senate, and any other Member of Congress who requests it.

(B) CONTENTS- The report under subparagraph (A) shall include a detailed description of the findings and conclusion of the Comptroller General with respect to the audit that is the subject of the report, together with such recommendations for legislative or administrative action as the Comptroller General may determine to be appropriate.

I agree – the best outcome is for banks to be able tofloat’ their reserve ratios. Then customers will be able to choose which deposit product suits them best (high interest on low reserve ratio account, low interest on high ratios), just dont come complaining to the government when a bank run occurs and the account holders who chose the 1% reserve ratio account offering 15% interest get locked out.

“America’s “golden age of capitalism” had a gold standard and fractional free banking, with reserve ratios of around 40%. This is not as low as now,probably due to a lack of technology.

I know this if off topic but America could be heading down a very stupid path.”

Inflating the aggregate ability of long term borrowers to bid nominally higher and higher prices on capital goods projects with long time structures out of the same ‘money pot’ as aggregate money owners with short time preference structures (they intend to deploy those money holdings at an instant) is no secret recipe for stable long term economic growth.

There is no long term ‘juice’ factor in pyramiding credit spending especially when it comes to trying to assemble an efficiently aligned, intricate, multi-decade, long term global capital production structure which really is the hand that feeds us.

19th century America was probably the best political environment the free market ever had particularly in terms of money and banking. But to imply that fractional lending was the driving factor during this period is nonsensical.

>19th century America was probably the best political
>environment the free market ever had particularly in terms
>of money and banking. But to imply that fractional lending
>was the driving factor during this period is nonsensical.

“There is no long term ‘juice’ factor in pyramiding credit spending especially when it comes to trying to assemble an efficiently aligned, intricate, multi-decade, long term global capital production structure which really is the hand that feeds us.”

Damian,

You don’t yet understand banking. Yes there is a credit multiplier but there is no “pyramiding”. For a bank to make a loan, first a deposit, draw down on owner’s equity or new fiduciary media must be created. Banks do not create money out of thin air. They create a chain of assets and liabilities. Please don’t read Rothbard, his ‘Austrian Money Supply’ (AMS) would define third party personal motor vehicle injury insurance policies (aka as Greenslips in Australia) as money. Please don’t get economics from truther sites either.

They don’t create more ‘money’ in the ultimate aggregate economic purchasing power sense of the word (emitting more medium of exchange dilutes the already existing stock of that medium with a time lapse for all the subsequent real world price change effects, and additional human responses to those changes to take place)

“or new fiduciary media must be created”

I will call that new media money in the sense that a new physical/conceptual unit of a general medium of exchange at that moment in time is dispatched into economic affairs and subsequently traded, obviously exerting it’s influence on money to goods ratios starting chronologically from the first receivers of the new media.

“They create a chain of assets and liabilities”

So do just plain old free floating market prices with out the so called liquidity management benefits of FR bankers juggling various time structures of assets and liabilities.

They do create a chain of asset and liabilities and it’s typically an artificial and unstable fruit-salad mishmash of time preferences.

You should read this Damian – but please make sure to read the Mises (Ch 17 Sec 12 of Human Action). Mises comes out in favour of free banking and denigrates 100% reserve requirements and inflationism (and notes that fractionality merely makes inflation more sensitive to central bank money growth).

Here I am arguing in favour of free banking, but you can see how what banks do doesn’t create inflation.

“The production-creation argument relies on a knowledge of the credit multiplier, the quantity of money relationship and Say’s Law. If market clearing works well enough over a threshold level (see Say’s law), then without central bank issuance of new money, or marketable private money (that is, money that is intrinsically worth something) then the bank multiplier cannot work and create money without being facilitated by successive rounds of productive activity.”

We know that a) MV=PY and b) inflation = growth of money supply – GDP growth (which more or less drives changes in money demand), so – if i) Say’s Law holds (influence of Government largesse is insignificant on market clearing) and ii) bank loans are made from owner’s equity or successive rounds of deposits (which must be preceded by productive activity or the dissavings for the process to continue) then M cannot increase proportionally more than Y even under the broadest definition of money unless there is an increase in the monetary base or the credit multiplier can be less than zero.

Thus, fractionality of fractional reserve or free banking does not cause inflation. The impact of the bank multiplier is to act as the driver of sensitivity of M1 growth or inflation as to the changes in M0. It is the excess of base money supplied relative to the bank multiplier and aggregate demand growth that drives inflation.

Inflation is simply caused because the federal reserves buy bonds etc. with money that they simply create out of thin air, then the banks loan against that money as if they had a legitimate deposit.

The reserve bank always ‘promises’ to sell back its assets to pull the fake inflation money, but it never does this correctly.

It basically works like this:
Reserve bank makes up $1 billion dollars out thin air.
Reserve bank buys $1 billion in bonds from a bank.
Bank uses $1 billion to loan and makes a nice profit. Meanwhile money is inflated by a few percent.
Reserve bank sells bonds back for $1 billion, even though they should be selling for 1.05 billion. Sometimes the reserve will sell back for less than that (if the reserve ends up negetive they of course just pay themselves with more made up money).
The end situation is that either more has been injected artificially (causing inflation) or there has been a shift in wealth into the banks.

The audit would allow people to see what is really going on. Many people believe that the reserve has huge amount ofs assets just because it keeps buying them with made up money and never sells them back. If the are audited there could be fire sale.

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